Eurozone finance ministers agreed on Saturday to lend Spain up to €100-billion ($125-billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week.
After a two-and-a-half hour conference call of the 17 finance ministers, which several sources described as heated, the euro group and Madrid said the amount of the bailout would be sufficiently large to banish any doubts.
“The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to €100-billion in total,” a Eurogroup statement said.
Spain said it wanted aid for its banks but would not specify the precise amount until two independent consultancies — Oliver Wyman and Roland Berger — deliver their assessment of the banking sector’s capital needs some time before June 21.
“The Spanish government declares its intention to request European financing for the recapitalisation of the Spanish banks that need it,” Economy Minister Luis de Guindos said at a news conference in Madrid.
He said the amounts needed would be manageable and that the funds requested would amply cover any needs.
Washington, which is worried the eurozone crisis could drag the US economy down in an election year, welcomed the announcement.
“These are important for the health of Spain‘s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area,” US Treasury Secretary Timothy Geithner said.
Likewise, the Group of Seven developed nations — the United States, Germany, France, Britain, Italy, Japan and Canada — heralded the move as a milestone as the eurozone moves toward tighter financial and budgetary ties.
IMF managing director Christine Lagarde said the eurozone’s plan was consistent with the IMF’s estimate of the capital needs of Spain‘s banks and should provide “assurance that the financing needs of Spain‘s banking system will be fully met”.
Eurozone policymakers are eager to shore up Spain‘s position before June 17 elections in Greece which could push Athens closer to a eurozone exit and unleash a wave of contagion. Spain‘s auditors could report back after that date.
Nonetheless, analysts said financial markets may be calmed by the announcement when they reopen on Monday.
“The figure of up to 100-billion is more encouraging and pretty realistic; it’s an attempt to cap the problem,” said Edmund Shing, European head of equity strategy at Barclays.
“The issue, however, is there is still a lack of detail about where the money’s coming from, which is crucial. The market will treat it with some caution until they see how it will be funded.”
The Eurogroup said the funds could come from either from the eurozone’s temporary rescue fund, the EFSF, or the permanent mechanism, the ESM, which is due to start next month. Finland said that if money came from the EFSF, it would want collateral.
EU sources said there was a preference to channel money to Spain through the ESM, rather than the EFSF. Under the ESM, an approval rate of 90% or less is needed to trigger aid, and the fund also has more flexibility in how it operates.
“That’s why it’s so important that the ESM … be ratified quickly,” German Finance Minister Wolfgang Schaeuble said.
The Spanish government has already spent €15-billion bailing out small regional savings banks that lent recklessly to property developers. Spain‘s biggest failed bank, Bankia, will cost €23.5-billion to rescue and its shareholders have been wiped out.
“Whatever the formula being used, we need to say two things: first the innocent should not suffer for the guilty, second public money should come back to public coffers,” said Socialist opposition chief Alfredo Perez Rubalcaba after speaking with Prime Minister Mariano Rajoy on Saturday morning.
Bad property loans
The race to resolve the banks’ troubles comes after Fitch Ratings cut Madrid‘s sovereign credit rating by three notches to BBB, highlighting the Spanish banking sector’s exposure to bad property loans and to contagion from Greece‘s debt crisis.
It said the cost to the Spanish state of recapitalising banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between €60-100 billion ($75-$125 billion).
While Spain would join Greece, Ireland and Portugal in receiving a European financial rescue, officials said the aid would be focused only on its banking sector, without taking the Spanish state out of credit markets.
That would be crucial to avoid overstraining the eurozone’s rescue funds, which would struggle to cover Spanish government borrowing needs for the next three years plus possible additional assistance for Portugal and Ireland.
Conditions in the plan did not appear to add to the austerity measures and structural economic reforms which Rajoy‘s government has already put in place.
“Since the funds being asked for are to attend to financial sector needs, the conditionality, as agreed in the Eurogroup meeting, will be specifically for the financial sector,” De Guindos said.
EU and German officials have cited national pride in the eurozone’s fourth largest economy as a barrier to requesting a full assistance programme.
The European Commission and Germany both agreed in principle last week that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3% of gross domestic product because of a deep recession.
Irish Finance Minister Michael Noonan said the funds would be provided through the EFSF or ESM at the same interest rates that apply to funds provided to other bailout countries. – Reuters